2021 Tax Lessons Learned
This post is for informational purposes only. Any ideas or strategies discussed below should not be undertaken by any individual without prior consultation with a tax or financial professional.
This year was marked by a lot of changes: growing our real estate holdings from four to six houses, adding a new member to our family and moving to a new state.
First, we had to find a new accountant. The firm we used previously was only offering packages that did not fit the size of our business or our needs. Chad contacted a CPA recommended by a fellow investor and friend. Both his friend and the tax professional are TKEs (pronounced “teeks”), members of a fraternity.
Cryptocurrency rocked the headlines as Bitcoin hit more than $50,000 a unit. While late to the party, we decided to invest last year. Chad paid for a recommended service called Coin Tracker* to generate the tax statements. After reviewing them, he found that it classified moving currency into an “unknown” wallet as a taxable transaction. While converting Ethereum or other currencies to Bitcoin is considered a taxable event, moving crypto from a cloud wallet to a hard wallet is not. Our accountant had to redo the form for a small fee, which saved us a few hundred dollars.
A Tale of Two States
Another item for review was our W2s. We changed our address with work once we moved to Florida. However, I changed only the mailing address. When my W2 arrived, it showed taxes taken from Colorado for the entire year. I was working from Florida (and also on my maternity leave) for a little less than half the year. Fortunately, it didn’t take long for my company to correct the form and that put about $3,000 back into our pockets.
We also usually itemized our taxes, but with the limits changing the standard deduction to $25,000, it no longer made sense for us. We plan to keep all the backup from our charitable donations, mortgage interest, and other items, but we didn’t have enough deductions to require spelling them out.
In Funds We Trust
Our accountant also advised us to create a donor advised fund. This allows you to put money aside to donate to charity. It remains tax-free as long as it is in the account. It operates like an irrevocable trust. That means that once it’s set up as a dedicated charity fund, the money put into the account cannot be used for anything else. However, you don’t have to donate it all at once. You can save over time if you want to make a larger contribution to a qualified organization at a later date. You also can invest the money, but all proceeds must go to charities.
The Taxman Cometh
Lastly, we learned that if you don’t give the government enough tax payments in advance, it will charge you a fee. For 2021, we paid a $123 penalty. Under advice from our CPA, we changed our tax deduction filing status. While the fee is not much, it is about one percent of what we owe in taxes. The penalty may increase if we continue to underpay each year so we’ll be looking to find the right balance. We’d rather get a smaller tax return so we can put that money to work, instead of giving it to Uncle Sam for an interest-free loan.
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What are your lessons learned from filing your 2021 taxes? Leave a comment below or send your story to [email protected].